Cross option agreements in the tech sector: A practical corporate perspective on succession planning

Succession planning should feature far earlier in the life of a business than it often does. For many founders it is pushed down the agenda by the immediate demands of scaling the company, building the product and securing growth. That omission can be particularly acute in technology businesses, where value is frequently tied to a small group of key individuals, core intellectual property and a growth trajectory that can alter the profile of the company very quickly.

Against that background, cross option arrangements are one of the most practical tools available under English law for dealing with the ownership and funding issues that arise when a shareholder dies or loses capacity. This article considers how cross option agreements work, the problems they are designed to solve and the reasons they are particularly relevant in founder-led and investor-backed technology companies.

What is a cross option agreement?

A cross option agreement is a contractual arrangement between shareholders that provides:

• A call option: surviving shareholders (or the company) can require the deceased shareholder’s personal representatives to sell the shares; and
• A put option: the personal representatives can require the surviving shareholders (or the company) to purchase those shares.

The rights are most commonly triggered by death and, in some cases, by critical illness or loss of capacity.

They are frequently supported by life insurance so that the acquisition of the shares can be funded without placing immediate strain on the business or the remaining shareholders. If drafted correctly, the structure can also support the intended inheritance tax treatment, including by helping to avoid the loss of business property relief.

Core benefits for succession planning

1. Certainty of ownership transition

Subject to the terms of the company’s articles of association and/or shareholders’ agreement, without a cross option arrangement, shares of a deceased shareholder will pass under their will or intestacy rules. This may result in:

• Shares being held by individuals with no commercial involvement;
• Fragmented ownership; or
• Disputes between surviving shareholders and beneficiaries.

Having a cross option agreement in place creates a defined route for the shares and makes it more likely that control will remain with those who are actively involved in the company. In a founder-led or closely managed business, that continuity can be critical.

2. Liquidity for estates

A separate but equally important issue is liquidity. Shares in a private company may represent substantial value but beneficiaries will often have no simple way of turning that value into cash.

Cross options address this by:

• Creating a contractual buyer for the shares; and
• Often being backed by insurance ensures funds are available.

For the estate, this can provide a more direct route to value and reduce the risk of being forced into a prolonged negotiation or a sale on unfavourable terms.

3. Alignment with tax efficiency

When properly drafted, cross option agreements can:

• Preserve business property relief (BPR) from inheritance tax; and
• Avoid being characterised as binding contracts for sale (which would otherwise jeopardise relief).

For that reason, they are often preferable, from a tax-planning perspective, to mechanisms that compel a transfer automatically or amount in substance to a binding sale arrangement.

4. Reduction of disputes

Where there is no agreed process to deal with a shareholder’s death, disagreements commonly arise over valuation, timing and who should end up holding the shares.

A well-structured cross option agreement will:

• Incorporate a pre-agreed valuation mechanism (e.g. formula or independent expert);
• Define clear timelines; and
• Integrate with shareholders’ agreements and articles.

That will not eliminate every point of tension, but it should materially narrow the scope for dispute at a time when both the business and the family are likely to be under pressure.

Why cross options are particularly valuable in the tech sector

1. Founder-centric value

Technology companies, especially early-stage and scale-ups, are often heavily dependent on:

• Founders’ expertise and relationships;
• Strategic vision; and
• Control over IP and product development.

An unexpected death can therefore unsettle the business quickly if ownership passes to individuals who are neither operationally involved nor aligned with the company’s commercial direction.
Cross option agreements ensure:

• Continuity of control among active founders or key investors; and
• Protection against dilution of strategic direction.

2. Investor expectations and governance

In venture capital and private equity-backed businesses, succession is rarely treated as an afterthought. Investors will usually expect the constitutional and investment documents to show how ownership disruption is to be managed. Cross option provisions:

• Provide predictability in cap table evolution;
• Reinforce governance discipline; and
• Reduce risk to valuation in subsequent funding rounds.

In practice, those arrangements will often sit alongside drag and tag provisions, leaver clauses and vesting mechanics in the wider constitutional package.

3. Valuation volatility

Tech companies are characterised by:

• Rapid valuation changes;
• Periodic funding rounds; and
• Revenue models that may not yet be stable.

That can make pricing the shares on death especially difficult. Cross option agreements can address this tension by:

• Linking valuation to recent funding rounds;
• Incorporating growth-adjusted formulas; or
• Providing for expert determination based on market conditions.

If handled well, those mechanisms give both the estate and the continuing shareholders a more credible basis for agreeing price.

4. Key person risk and insurance integration

In technology businesses, key person risk is often pronounced, and cross option arrangements are frequently paired with insurance structures intended to support both funding and wider continuity planning.

• Key man insurance; and
• Life policies written in trust aligned with shareholders’ interests.

This integrated approach:

• Ensures funding is available when needed;
• Protects business cashflow; and
• Supports wider risk management strategies.

5. IP and confidentiality considerations

Much of the value in a technology company sits in proprietary information, intellectual property and the people who know how to use and develop it. An uncontrolled transfer of shares can therefore create confidentiality concerns, strategic misalignment and, in some cases, competitive risk.

• Confidentiality risks;
• Misalignment on IP strategy; and
• Potential competitive concerns.

Cross option arrangements can reduce that risk by making it more likely that ownership remains within a commercially aligned group.

Future-proof your tech business

Cross option agreements remain one of the most useful succession-planning tools available to private companies under English law. In the technology sector, their importance is heightened by founder dependency, valuation volatility and the governance expectations that often accompany external investment. When properly structured, they deliver:

• Certainty of ownership transition;
• Liquidity and fairness for estates;
• Tax efficiency; and
• Preservation of business stability.

For technology businesses at every stage, from founder-led start-ups to later-stage scale-ups, it is important to consider such arrangements at the earliest stage possible and ensure they are integrated into the wider legal and governance framework, rather than negotiated only when an unexpected event has already occurred.

if you or your business has any corporate matters you would like advice on, including further details on acquiring a business, please contact our corporate lawyers by email on [email protected].